Legal Lode: The Shady Bunch

Compton, Calif., wins multi-million verdict against pay-to-play franchisee.

When we last left the madcap story of the city of Compton's dealings with finagler Michael V. Aloyan ("Here Comes the Bribe," Waste Age, October 2010), the California municipality had just awarded its waste collection franchise to Aloyan's HUB City Solid Waste Services Inc. with a December 2000 city council vote.

Four years later, when the composition of the council had changed, it voted to terminate the franchise agreement based on HUB's failure to formally disclose campaign contributions to city council members, Aloyan's violation of state conflict of interest laws, and his federal court conviction in yet another bribery case. He served five months in federal prison for attempting to influence city officials in Carson, Calif., on a trash contract.

Shortly thereafter, HUB filed suit against the city in Los Angeles County Superior Court for wrongfully terminating the franchise, bad faith, unjust enrichment and other relief. The city responded with a cross-complaint against Aloyan and HUB claiming illegal conflicts of interest and seeking a ruling that its summary termination of the franchise was justified and that Aloyan was the alter ego of HUB and thus should be held personally responsible for his company's wrongdoing.

Before the jury heard the parties' respective damage claims, the judge held a bench trial on whether Aloyan could be held individually liable for what HUB did.

In California, and, for that matter, in most other jurisdictions, an individual who owns a business cannot hide behind a corporate structure to escape liability for the acts of the business (a) if the corporation and its principal shareholder have such a "unity of interest" that their separate personalities do not exist and (b) if treating the acts as strictly those of the corporation would be inequitable.

The trial judge found a unity of interest from the fact that HUB was formed for the sole purpose of entering into a franchise agreement with the city, had no board of directors as required by its articles of incorporation, was inadequately capitalized, diverted its assets to pay Aloyan's personal credit card expenses and criminal defense expenses, and shared with Aloyan the same attorneys in all matters.

The court also found that "inequity would result" if the wrongdoing alleged by the city was attributable to HUB alone. Given that Aloyan routinely diverted HUB's cash to himself and his personal expenses, "HUB remained … undercapitalized, while Aloyan's personal wealth increased," the judge wrote. "[If] the City obtains a verdict against HUB and Aloyan on its cross-complaint, it would be unjust to limit the City to recovering from HUB alone. … Aloyan's conduct amounting to bad faith makes it inequitable for him to hide behind the corporate veil."

In October 2006, both sides presented their cases to a jury. HUB claimed that the city still owed money for services under the franchise agreement. The city wanted restitution for all amounts paid to HUB from the outset. After a month-long trial, the jury deliberated only three hours before returning a unanimous verdict of $22.4 million in favor of the city based on a finding that HUB and Aloyan had violated the state conflict-of-interest law.

On appeal, the verdict was upheld. By using HUB as a "shell corporation," Aloyan could be held "accountable for HUB's actions," the three-judge appellate panel wrote.

"As HUB's alter ego, Aloyan had a personal financial stake in the franchise agreement … neither remote nor speculative … result[ing] in an immediate and obvious conflict of interest."

Supporting the city's other conflict-of-interest theory, the appeals court concluded that HUB's political contributions were so closely linked to the franchise as to saddle the recipients with "illegal interests in the contract" under state law. "[F]orbidden interests extend to expectations of benefit by express or implied agreement and may be inferred from the circumstances."

[Hub City Solid Waste Services, Inc. v. City of Compton, No. B196639, Cal.App.Dist.2, July 19, 2010]

Barry Shanoff is a Rockville, Md., attorney and general counsel of the Solid Waste Association of North America.

The legal editor welcomes comments from readers. Contact Barry Shanoff via e-mail: [email protected].

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